Canada: What To Do When Construction Projects Go Bad

Last Updated: February 19 2009
Article by Robert J. Simpson

It has been a number of years since we have had to worry about construction projects going bad. Unfortunately, the current economic crisis and a declining real estate market has resulted in the first wave of construction project collapses. It is, therefore, appropriate to revisit what to do when construction projects go bad.

In order to be in a position to react properly to a construction project that is in the process of going bad, we first have to be in a position to recognize that it is happening. There are tell-tale signs that a construction project is on the verge of collapse.

From an owner's perspective, warning signs that the contractor is experiencing difficulties that might give rise to a default include:

  • Personnel changes with the more experienced superintendent or supervisor being replaced by a far more junior person.
  • A slow down in the progress of the work with less manpower showing up on the site to work and subcontractors not showing up to do the available work at all.
  • Materials not being delivered when required (i.e. the concrete isn't supplied on the scheduled concrete pour date).
  • Subcontractors overheard complaining about not being paid and calls from subcontractors and suppliers are received asking about payment of their outstanding accounts.
  • Subcontractor and material suppliers' liens are registered.

From a contractor's perspective, warning the signs that the owner is having difficulty in meeting its financial commitments are less obvious. The following indications of financial difficulty should be watched very carefully:

  • Progress claims are not paid when due or are not fully paid.
  • Arguments about the payment for extras that had previously been requested, agreed to and priced arise.
  • Requests are made to scale back the scope of the project or to find ways for additional costs savings.
  • You learn that other contractors working on the site have registered liens.

Once an owner or a contractor comes to the realization that the construction project they are involved in is potentially on the brink of collapse, there are certain initial investigations that should be considered.

From an owner's perspective, the first step that should be taken in these circumstances is to search the title to see if liens have been registered. If no liens are then registered, the owner should nonetheless continue to search the title on the day that any progress payment is made to ensure that the title is clear of liens on the day the payment is made. The owner should as well consider having its consultant review the project to advise as to whether or not in the consultant's opinion: the contractor is maintaining the construction schedule, the quality of the work and materials being supplied comply with the specifications and the contractor's progress claims reflect the value of the work in place.

A contractor should consider searching title to determine if other contractors have, in fact, registered liens and details concerning the amounts claimed. The greater the amount claimed in the contractor's Statement of Lien, the greater the concern. The contractor should as well consider making a request to the owner for reasonable evidence that financial arrangements are in place to allow the owner to pay the amount payable to the contractor. The terms of most construction contracts provide that a contractor is entitled to make this request and receive a response to it. (For instance, see GC 5.1.1 of the CCDC 2 Stipulated Price Contract General Terms and Conditions).

When an owner determines as a result of its investigations and the advice received from its consultant that a contractor has fallen behind schedule and appears to be in financial difficulty, the owner's options are usually set out in the construction contract. Typically, a construction contract will provide that an owner is entitled to give the contractor notice that it is in default and that it is required to either correct the default within the period of time stipulated in the contract or provide a plan that will result in the contractor getting back on schedule (GC 7.1 of the CCDC 2 Stipulated Price Contract is one example of this type of default notice provision). An owner must, however, be careful that any notice of default is sent strictly in compliance with the requirements of the applicable contract provisions. If a letter from the consultant confirming that the contractor is in default is required as a pre-requisite to the owner sending out a default notice, the consultant's letter must be obtained before the owner sends out the default notice.

If a contractor has provided Labour and a Material Payment Bond and a Performance Bond to the owner guaranteeing its work on the project, the owner should as well provide a copy of the default notice to the surety company which issued the Bond. The surety company will normally then commence its investigation of the situation. This will become important should the surety have to step in to arrange for or complete the contract.

If a contractor's investigations disclose that the owner is indeed in financial difficulty, the contractor as well can issue a default notice to the owner setting out the contractor's concerns, giving the owner a specified period of time to reply. A default notice can be sent if the owner fails to respond to a request that it provide financial assurances to the contractor. The circumstances that allow a contractor to send out a default notice and the procedure for doing so is usually spelled out in the contract (GC 7.2.3 of the CCDC 2 Stipulated Price Contract is one example of this type of contractual provision). A contractor should also consider sending a copy of the default notice to its surety to put the surety on notice that there is a contractual dispute with the owner that arises from the owner's default. The surety may have already received conflicting information from the owner and in any case should be kept informed about what is happening on the project. The contractor, in addition to sending the owner the default notice, should as well register a lien against the project for the amount owing to it.

In the event that the owner doesn't receive a satisfactory response from the contractor to the owner's default notice, the owner will then have to consider its options, which are to hire another contractor and make arrangements for other suppliers to work with the contractor to complete the project or terminate the contract and have others complete it. Which option is chosen will depend upon several factors including the stage of completion of the project and whether or not there are other contractors available in the marketplace which can step in and complete the contract. The owner's choice of options will also be influenced by the position taken by the surety.

Once the owner has determined its course of action, it must give notice to the contractor particularly if the owner has determined that it is terminating the contract. This is because most construction contracts require that a notice of termination following a notice of default be issued. In the event that notice of termination is issued, the owner should then engage its consultants in a review of the status of the work on the date the contract was terminated. The consultant should take careful note of the progress of each phase of the work, deficiencies that have yet to be corrected and what material and equipment have been left on the site by the contractor. This information is important in establishing the progress of the work at the date the contract was terminated, the value of the work in place and will help prove the cost of completing the work. All this information will be necessary in the future to deal with the final contract accounting that will be necessary to set lien funds and deal with the subcontractors, suppliers and even the contractor's liens which will most likely be registered against the project. The surety should be copied with the notice of termination and will as well be interested in receiving the consultant's report on the status of the project.

While it is obvious that an owner will cease paying the contractor for any of the work that had been done on the termination of the contract, the owner still has an obligation to keep records of the cost of completing the contract work and at the end of the day will be required to provide the contractor with an accounting of those costs. In a typical situation, the cost of completing the work is usually greater than the amount owing to the contractor but if it is not, the contractor will be entitled to payment of the difference. This accounting of course will have to take into account any amounts paid by the owner to discharge subcontractors' and suppliers' liens. If a surety is involved, much of this accounting work will be done by the surety and it will settle up the accounts with the contractor at the end of the day.

If the contractor does not receive an appropriate response to its default notice, it can either suspend the work or terminate the contract. Which option is chosen again will depend upon the circumstances of each case. For instance, if the owner's financial difficulties that have delayed payments being made are thought to be temporary, a contractor might choose to suspend the work as opposed to terminating the contract. On the other hand, if there is no assurance that the owner's financial difficulties will be corrected at all or if the owner's ability to pay persist for an unusual length of time, the contractor might consider terminating the contract. In either case, the contractor should take steps to record the status of the work done by it on the project, including any known deficiencies that it has not yet had an opportunity to correct and an inventory of its equipment left on the site, including any equipment rented from third parties. Should the contractor determine that it is appropriate to terminate the contract, it must remember to cancel any equipment rental contracts it entered into as well as making arrangements to remove its equipment from the site.

The contractor will then be in the position to bring proceedings to enforce its builders' lien and within those proceedings claim any additional damages, including loss of profit and additional overhead expenses that arise from the owner's default and the subsequent termination of the contract.

Dealing with a construction project that has gone bad can be a difficult task especially because everything happens so quickly in these circumstances. However, it can be managed to the best advantage of an owner or a contractor by careful planning and by considering the terms of the contract which not only provides guidance but sets out the rules that apply in the circumstances. By following those rules and keeping appropriate records that will be required later on, the trauma of a construction project that has gone bad can be minimized.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
4 Nov 2016, Seminar, Toronto, Canada

Please join us for a complimentary half-day seminar on the following topics:

  • "When “actively employed” is not enough: Employee bonus update", presented by Matthew Curtis and Chelsea Rasmussen
  • "The top 10 labour arbitration cases of the past year", presented by
18 Nov 2016, Seminar, Vancouver, Canada

Ten days following the election, join us for a discussion with Gary Doer, former Canadian Ambassador to the US, and Gordon Giffin, US Ambassador to Canada under Bill Clinton, to discuss how the new President and Congressional makeup will shape US-Canada relations for years to come.

25 Nov 2016, Seminar, Toronto, Canada

On Thursday, September 22, 2016, Dentons hosted a panel discussion about the management of liabilities and risks associated with environmental crises, including potential liabilities for directors and officers and provided insight into risk and liability techniques associated with environmental crisis management.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.